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Steady quarter; treasury gains drive earnings beat NIM stable at 3.32%; core fee income gaining momentum

* Federal Bank (FB) reported 2QFY27 PAT of INR13.9b (up 45% YoY/18% QoQ, 10% beat), led by higher other income and lower-than-expected provisions. This was partly offset by higher opex, including a one-time impact of INR0.33b due to a change in ESOP accounting.

* NII grew 26% YoY/7% QoQ to INR31.5b (in line). NIM contracted 1bp QoQ to 3.32% (vs MOFSLe of 3.18%).

* Advances grew 22% YoY/7.5% QoQ to INR2.98t, led by the SME, gold, and corporate segments. Deposits grew 18.6% YoY/7.1% QoQ to INR3.42t, aided by FNCR(B) mobilization of INR149b. Leverage provided against FCNR(B) deposits was INR94b. The CASA mix declined 19bp QoQ to 32.0%.

* Provisions declined 6% YoY/rose 8% QoQ to INR3.4b. Slippages rose 3% QoQ to INR4.26b. GNPA/NNPA ratios improved 20bp/1bp QoQ to 1.32%/0.17%. PCR declined 59bp QoQ to ~86.8%.

* We tweak our PAT estimates for FY27/FY28, factoring in higher other income, partly offset by higher opex. We estimate FB to deliver FY27E RoA/RoE of 1.30%/12.4%. Reiterate BUY with a TP of INR385 (based on 1.9x FY28E ABV).

Strong business growth; asset quality healthy

* FB reported 2Q earnings of INR13.9b (up 45% YoY/down 18% QoQ, 10% beat) amid higher other income and lower provisions, partially offset by higher opex.

* NII grew 26% YoY/7% QoQ to INR31.5b (in line). NIM contracted 1bp QoQ to 3.32% (vs MOFSLe of 3.18%), as a 4bp QoQ reduction in CoF was largely offset by a 3bp QoQ decline in YoA.

* Other income rose 38% YoY/42% QoQ to INR14.9b (27% beat) amid strong treasury income of INR2380m, supported by the encashment of SR investments and robust IPOs.

* Opex grew 21% YoY/15% QoQ (in line), with a one-time adverse impact of INR0.33b from the change in ESOP accounting. C/I ratio stood at 52.1%. The bank expects opex ratios to remain sticky in the near term. PPoP increased 35% YoY/17% QoQ to INR22.3b (8% beat).

* Advances grew by a healthy 22% YoY/7.5% QoQ to INR2.98t, driven by robust growth in SME (19.9% YoY/7.2% QoQ), gold (37% YoY/ 6.7% QoQ), and corporate (14% YoY/4% QoQ). Retail book grew 19.9% YoY (7.2% QoQ), with leverage provided against FCNR(B) deposits of INR94b. PL and CC grew by a healthy 6% and 7% QoQ, respectively.

* Deposits grew 18.6% YoY/7.1% QoQ to INR3.42t, aided by FCNR(B) deposits of INR149b. CASA deposits grew 6.4% QoQ, with the CASA mix declining 19bp QoQ to 32.0%.

* Provisions declined 6% YoY/rose 8% QoQ to INR3.4b. Slippages rose 3% QoQ to INR4.26b (INR4.12b in 1QFY27). GNPA/NNPA ratios improved 20bp/1bp QoQ to 1.32%/ 0.17%.

Valuation and view: Reiterate BUY with TP of INR385

FB reported an in-line quarter, supported by strong other income and lower provisions, partly offset by higher opex. NIMs were stable at 3.32% (-1bp QoQ), with reduction in CoF being offset by a decline in yield on advances. Loan growth remained healthy, led by the SME, gold loan, and corporate segments. The bank has guided for loan growth in the mid-teens range, led by medium- to high-yielding segments. Deposit growth stood at 19% YoY, driven by healthy FCNR(B) deposit mobilization. CASA deposits grew 6% QoQ, led by strong traction in current accounts. Asset quality improved, with both GNPA and NNPA ratios declining further. We estimate credit cost to remain contained at ~45-50bp over FY27-28. We tweak our PAT estimates for FY27/FY28, factoring in higher other income, partly offset by higher opex. We estimate FB to deliver FY27E RoA/RoE of 1.30%/12.4%. Reiterate BUY with a TP of INR385 (based on 1.9x FY28E ABV)

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